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Professor Gaizka Ormazabal
Professor of Accounting and Control
IESE Business School
University of Navarra

This paper examines the role of financial frictions on the trading of emission allowances. Based on a wide international sample of firms and data from the European Union Emission Trading System (the most liquid and developed in the world) we document that firms with liquidity needs are significantly more likely to sell allowances. We also observe more frequent selling of allowances when the transaction is likely to boost earnings and avoid accounting losses. This selling behavior is particularly pronounced in the final month of the fiscal year and at times of higher carbon prices. Our results have implications for the efficacy of carbon markets. The evidence supports the concern that substantial trading of emission allowances by firms with compliance obligations is driven by reasons other than meeting emission requirements.